Schaeuble trap for Greece

I fear sometimes that German Finance Minister Wolfgang Schaeuble and his allies are simply feeding the Greek government rope so it can hang itself. A superficial reading of developments tells us that Europe does not want a Greek meltdown at a time of terror attacks, the migration crisis and the threat of Brexit. Indeed, it is true that efforts are being made to loosen the terms of the Greek bailout review and satisfy Prime Minister Alexis Tsipras’s demand for no cuts to main pensions. The policy line is clear: We agreed to a framework last summer and how you will achieve this is your business.

It is here, however, that the government’s obsessions clash with the creditors’ desire not to rock the boat. Athens agreed to raising taxes and social security benefits so that everything looks nice and tidy on paper, and all the numbers add up. Pressure for real reform has eased because even the experts have realized that it is a nonstarter right now. There is also little hope on the privatization front, with the exception of Piraeus Port Authority, as the rebellion within the government has more or less quashed any chance of major investments. After all, what ultimately matters is that neither Berlin nor any other government has to face it own parliament with a fresh demand for money for Greece.

The government is pleased because it thinks that Schaeuble is on its side. It doesn’t see the trap. The hikes in taxes and social security contributions it is planning will have a negative effect on the economy, possibly a big one. It is not a question of ideology. A simple walk in any shopping district provides proof enough. Tsipras believes in the best-case scenario, whereby the successful completion of the review will shock the economy back to growth through the settlement of the state’s debts and improvements in investment. I hope he’s right and that what’s left of the productive part of the economy does not end up paying the price if he’s wrong. Under the present government, I find a sudden surge in investments quite unlikely, unless of course those chasing off investments are simply putting on a show while actually coming up with ways to make the country some money.

The danger, of course, is that a moment will come in the next few months when we all realize that the numbers don’t actually add up. When the penny drops, even the most pro-European part of society will question whether it’s all worthwhile. Schaeuble will have given Tsipras all the rope he needs to hang himself and the economy. And in such cases, it is likely that we will see more voices calling for what Schaeuble has wanted since last summer: a time-out from a program that was never meant to be implemented and, of course, a time-out from the eurozone.

It will be a real shame if we reach that point after so much pain and sacrifice.